Can a Lender Finance a Home Without an Appraisal?
A lender typically could finance a home without an appraisal, but practically speaking, they do not do this. Most lenders require an appraisal of the property prior to financing because it helps them make certain their investment in financing the purchase is a good deal.
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Appraisal Basics
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A real estate appraisal is an estimate of worth of a property performed by a legally certified real estate appraiser. The buyer following agreement on a purchase contract hires the appraiser and fees are usually paid at closing. An adequate appraisal is typically a contingency in the real estate contract because lenders will not finance the buyer without one. The appraisal includes a break down of each main room and component of the home and detailed analysis include in the final appraiser's report.
Lender's Concern
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Lenders require the appraisal because the already high risks of financing a property purchase become even greater if the property is worth much less than the contract price. The home serves as collateral on a home loan. If the collateral backing the loan is worth $150,000 and the financing is $200,000, the lender is already in the hole by $50,000 if you default and foreclose on the loan and the lender has to repossess the home as a remedy.
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What Happens
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When appraisers generally agree that the contracted purchase price on a home is reasonable, appraisal values tend to come it at or just above that agreed upon price. It is when the appraisal sees a serious discrepancy that his appraisal may come in low. Assuming the standard contract contingency is in place, the seller usually has two options when the appraisal is low. He can either accept the appraisal amount in a contract amendment, or void the deal and attempt to resell the house and hope for a higher appraisal the next time.
Streamline Exceptions
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A common exception to the norm of appraisal-required financing is streamline refinancing. Refinancing is when you acquire a new mortgage to take over an existing one. The Federal Housing Authority commonly offers streamline refinances to its qualified homeowners. This includes no income or asset verification, and often no appraisal. Lenders are more comfortable refinancing this way once a borrower has a lengthy and proven history. Though not as common, some private sector banks have begun offering their own versions of streamline financing for highly qualified borrowers, which may also remove the appraisal requirement.
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References
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